Verizon Gaining on Cingular

The No. 2 cell-phone service racks up a record quarter with 1.9 million net user adds.
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Verizon Wireless blew out its subscriber growth numbers for the second quarter.

Setting a new record for quarterly customer wins,

Verizon

(VZ) - Get Report

will announce Tuesday that joint venture Verizon Wireless added 1.91 million net new subscribers. The number is implied by Monday's release from venture partner

Vodafone

(VOD) - Get Report

, which said its 45% portion of the net new user gain was 850,000.

Industry watchers were expecting about 1.6 million net adds for Verizon Wireless in the recent quarter. In the first quarter, net additions were 1.54 million.

Verizon is due to report second-quarter earnings before the opening bell Tuesday, and investors will be paying close attention to the performance of its wireless unit. The previous quarterly net new subscriber record was 1.8 million users added by

Cingular

in the fourth quarter of 2004.

The record growth pace at Verizon Wireless cannot be comforting to larger rival Cingular, which

stumbled during the second quarter, with 1.07 net new subscribers added. Cingular, co-owned by

SBC

(SBC)

and

BellSouth

(BLS)

, is the nation's largest wireless shop, with 51.6 million subscribers. Verizon Wireless is gaining market share fast with 47.4 million users at the end of June.

While investors cheer Verizon Wireless' user growth, there is some concern that the gains are coming largely from prepaid calling plans and family package offerings.

Prepaid plans are generally month-to-month and prone to heavy turnover. These defections, if included with the total customer departures, could serve to bump up churn rates. In the first quarter, Verizon Wireless trimmed monthly churn, not including prepaid, to 1.3%.

Family packages have helped push growth just as the market was expected to start cooling off due to saturation. The family plans allow customers to add phones to a monthly plan for about $10 extra.

The downside for the industry is that adding customers who pay less can lower a company's average revenue per user, or ARPU, performance. In the first quarter, ARPU was $50 at Verizon.

But if average bills are getting smaller for Verizon Wireless, chances are they are shrinking for others, too, say analysts.

"During the past couple of quarters, wireless family plans contributed more than 50% of wireless net additions," CIBC World Markets analyst Tim Horan says in a note Monday. "However, this growth is pressuring the whole sector."

On Monday, all the big telcos posted modest gains, with Vodafone rallying 32 cents to $25.30, Verizon adding 8 cents to $34.25, SBC gaining 15 cents to $23.87 and BellSouth rising 19 cents to $26.91.